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Are Consumption Taxes Regressive in Quebec?
Luc Godbout and Suzie St-Cerny*
P R É C I S
Cette étude remet en question la présomption voulant que les taxes à la consommation — au Québec, la taxe sur les produits et services du gouvernement fédéral (TPS) et la taxe de vente du Québec (TVQ) — soient régressives. À l’aide de l’Enquête sur les dépenses des ménages de Statistique Canada, les auteurs analysent le panier de produits taxables et non taxables des ménages québécois pour chaque quintile de revenu. Leurs résultats montrent que sans les crédits pour TPS/TVQ, les taxes à la consommation sont pratiquement proportionnelles au revenu des ménages; toutefois, avec les crédits, le taux de taxe effectif augmente avec le revenu. Ainsi, les crédits de taxes constituent un outil plus efficace pour améliorer la progressivité des taxes à la consommation que la détaxation des produits alimentaires de base. Finalement, les résultats indiquent aussi que, à l’image de la réduction récente du taux de TPS, une augmentation du taux de TVQ, jumelée à des changements au crédit de TVQ remboursable, profite même aux ménages des quintiles de revenu les plus bas.
A B S T R A C T
This study questions the presumption that consumption taxes—in Quebec, the federal goods and services tax (GST) and the Quebec sales tax (QST)—are regressive. Using Statistics Canada’s Survey of Household Spending, the authors identify the basket of taxable and non-taxable consumption of Quebec households for each income quintile. Their results show that without GST-QST credits, consumption taxes are almost proportional to household income; however, with these credits, the effective tax rate rises with income. By this measure, the tax credits are a more effective tool for improving the progressivity of consumption taxes than the zero-rating of basic groceries. Finally, the
* OfUniversitédeSherbrooke,Quebec(e-mail:[email protected];[email protected]).WewishtothankFrançoisDrouin,ofUniversitédeSherbrooke,whoagreedtoexplore(aspartofhisresearchtowardamaster’sdegreeintaxation)thepotentialforanalysisregardingthebreakdownofconsumptiontaxesusingdatafromStatisticsCanada’sSurveyofHouseholdSpending,andfocusinginparticularoneffectivetaxrates.Hisworkhasconfirmedtherelevanceoffurtheranalysisoftheregressivenatureofconsumptiontaxes.Theviewsandconclusionspresentedinthisarticleremain,ofcourse,entirelyourresponsibility.
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results also indicate that, like the recent reduction in the GST rate, increases in the QST rate, combined with changes to the refundable QST credit, benefit even households in the lowest income quintiles.
KEYWORDS: CONSUMPTION TAX n GST n QST n PROGRESSIVE TAXES n SALES TAXES n REGRESSIVE
C O N T E N T S
Background 464Consumption Taxes and Their Impact on Households 465
Consumption Taxes: The Current Situation 465The Fiscal Impact of Taxes 466The Regressive Aspect of Consumption Taxes 468Tools for Reducing or Eliminating the Regressive Effect of Consumption Taxes 471
Multiple Rates 471Exclusions 471Tax Credits or Allowances 472
Measures of Progressivity 474The Methodological Approach for Distributing the Weight of Consumption Taxes 476
Survey of Household Spending 476Household Type 477Measure of Household Income 477Breakdown of Households by Income 477Breakdown of Taxable Spending by Quintile 478Government Revenues Derived from the QST 480
The Survey of Labour and Income Dynamics 481Consumption Taxation of Households in 2008 482
Breakdown of Consumption Taxes 482Are Consumption Taxes in Quebec Truly Regressive? 483
Tax Concentration Curve 484Index of the Share of Taxes as a Proportion of the Share of Income 484Measurement of the Effective Consumption Tax Rate 486
Factors of Progressivity of Consumption Taxes in Quebec 486Impact of Changes to GST and QST Rates 488
The Reductions in the GST Rate in 2006 and 2008 489The Increases in the QST Rate in 2011 and 2012 489Changes in the Combined GST-QST Rate, 2005-2012 490
Conclusion 491
B ACKGRO UND
InQuebec,thefederalgoodsandservicestax(GST)andtheQuebecsalestax(QST)applytomostgoodsandservicesconsumed.
Despite existingoffsettingmeasures, suchas the zero-ratingor exemptionofcertainproductsandservicesandrefundableGST-QSTcredits,thereisanabidingnegativeimpressioninQuebec,asinCanadagenerally,regardingtheuseofcon-sumptiontaxes.AlthoughfewstudieshavedealtspecificallywiththissubjectsincetheimplementationoftheGSTandtheQST,thereisastronglyheldpublicpresumption
are consumption taxes regressive in quebec? n 465
regardingtheunfairnatureofconsumptiontaxes.Thisstudyaddressesaseriesofquestions:
n Arethesetwoconsumptiontaxesaregressiveformoftaxation?n Dotheoffsettingmeasureseliminatetheinherentregressivityofconsump-
tiontaxes?n Willthesituationbeexacerbatedbytherecentandexpectedchangestothe
GSTandtheQST?
TherecentandexpectedchangestotheQSTprovideatimelyopportunitytoundertakearigorousstudyoftherepercussionsofconsumptiontaxes,inordertodeterminewhetherornotthenegativeperceptionisjustified.
CO NSUMP TIO N TA X E S A ND THEIR IMPAC T O N HO USEHO LDS
Anessentialexerciseindevelopingfiscalpolicyconsistsofassessingtheimpactofconsumptiontaxesonhouseholdsaccordingtoincome.Thistypeofstudyattemptstoansweravarietyofquestions.Forinstance,whatwouldbetheresultofachangeintherelativeweightoftaxesonincomedistribution?1Putmoresimply,whopaysconsumptiontaxes?
Consumption Taxes: The Current Situation
TheGSTbecameeffectiveonJanuary1,1991,replacingthefederalmanufacturers’salestax.2Sincethen,sixprovinceshaveharmonizedwithit.Quebecwasthefirsttofollowthefederallead:onJuly1,1992,itreplaceditsretailsalestax,datingfrom1940,with theQuebec sales tax (QST).3Since1997, the federalgovernmenthascollectedaharmonizedsalestax(HST)inNewBrunswick,NovaScotia,andNew-foundland, in place of the GST and the provincial sales tax.Ontario and BritishColumbiahavealsoadoptedtheHST,effectiveJuly1,2010.4
1 See,forexample,GérardForgeotandChristopheStarzec,“L’impactredistributifdesimpôtsindirectsenFrance”(2003)13Public Economics3-43.
2 TheinitialGSTratewas7percent;ithassincebeenreduced,asdescribedbelow.SinceJuly1,1992,RevenuQuébechasadministeredtheGSTthroughoutQuebeconbehalfofthefederalgovernment.
3 TheinitialQSTrateswere4percentonservicesand8percentongoods.InMay1994,asinglerate,6.5percent,wasapplied,whichwassubsequentlyraisedto7.5percent,onJanuary1,1998,andto8.5percent,onJanuary1,2011.Furtherincreasesareplanned,asdescribedbelow.
4 TheHSTisdifferentineachprovince.ThecurrentHSTratesdifferinsomeprovinces(12percentinBritishColumbia;13percentinOntario,NewBrunswick,andNewfoundland;and15percentinNovaScotia).Thezero-ratedorexemptgoodsandservicesarealsodifferentinsomecases;forexample,children’scarseatsandcarboosterseatsareexemptfromtheprovincialportionoftheHSTinOntarioandBritishColumbia,butnotinNovaScotia.
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In2011,theGSTrateis5percentandtheQSTrate,8.5percent.However,theQSTappliestothetotalofthesalespriceandtheGST,resultinginacombinedsalestaxrateof13.93percentratherthan13.5percent.5SincetheGSTandtheQSTarevalue-addedtaxes,companiesthatcollectthetaxescanrecoverGSTandQSTthattheypaidontheirinputs.
In2007,consumersinQuebecpaid$7billioninGSTand$8.8billioninQSTontheirpurchasesofgoodsandservices.FortheQuebecgovernment,theQSTisthesecond-largestsourceofrevenueafterpersonalincometax,accountingfor22per-centofallitstaxrevenue.Forthefederalgovernment,theGSTgenerated15percentofitstaxrevenue,withroughlyone-fifthbeingcollectedinQuebec.6
TheGSTrateremainedunchangedat7percentfor15years.Thefederalgov-ernmentreducedtheratefrom7percentto6percentonJuly1,2006,andthento5percentonJanuary1,2008.Despitethelowerrate,theparametersoftherefund-ableGSTcreditforindividualswerenotchanged,meaningthatneithertheamountnorthereductionthresholdoftheGSTcredithasbeenreviseddownward.
InQuebec,thegovernmenthasannouncedaseriesofchangestotheQST.IntheMarch2009plantoreturntoabalancedbudget,thegovernmentannouncedthatthe QST rate (then 7.5 percent) would rise by 1 percentage point on January 1,2011.7Then,inthe2010-2011budget,thenewplantoreturntoabalancedbudgetannouncedanotherincreaseintheQSTrate,from8.5percentto9.5percent,totakeeffecton January1,2012.8Alongwitheachof these ratehikes, thegovernmentstipulatedanincreaseintherefundableQSTcredit.Itwasannouncedinthe2010-2011budgetthattherefundablecreditfortheQSTwouldbecombinedwithtwootherrefundabletaxcreditstoformthenewrefundablesolidaritytaxcredit.Thebudgetstatedthat,essentially,thisnewtaxcreditwillprovidemoreassistancetohouseholdstomitigateQST-relatedcosts.Sinceithas(sofar)beenpossibletoextracttheQSTcreditcomponentfromthesolidaritytaxcredit,wecanseethattheQSTcreditwillbeincreasedin2011and2012toreflecttheincreasesintheQSTrate.
The Fiscal Impact of Taxes
Studiesexaminingthebreakdownoftaxesfocusonthefiscalimpactoftaxation;inparticular,theymeasurethedistributionofalltaxeswithinthepopulation.9
5 Forexample,foraproductwitharetailpriceof$100,the5percentGSTis$5,andtheQSTiscalculatedonavalueof$105atarateof8.5percent,sothattheQSTpayableis$8.93.Thetotalofthetaxesisthus$5+$8.93=$13.93.
6 StatisticsCanada,CANSIMdatabase,tables284-0004and384-0007;InstitutdelastatistiqueduQuébec,Comptes économiques des revenus et dépenses du Québec,2009ed.(QuebecCity:InstitutdelastatistiqueduQuébec,2010);andFinancesQuébec,2010-2011Budget,BudgetPlan,March30,2010,atI.4.
7 FinancesQuébec,2009-2010Budget,BudgetPlan,March19,2009,atA.44-45.
8 FinancesQuébec,2010-2011Budget,AdditionalInformationontheBudgetaryMeasures,atA.9.
9 ForCanadainparticular,seeG.C.Ruggeri,D.VanWart,andR.Howard,“TheRedistributionalImpactofTaxationinCanada”(1994)42:2Canadian Tax Journal417-51;FrankVermaeten,
are consumption taxes regressive in quebec? n 467
Fiscalimpactstudiesgenerallymakeuseofmicrodata,andtheresultsarepres-entedbyincomegroupaccordingtohouseholdcategory.Insomecases,householdsareconvertedintoadultequivalentsusingequivalencescales.However,householdsremainacommonunitofobservationinstudiesoffiscalimpact.10
Whilemoststudiesuseannualdata,someattempttoestimateconsumptionandincomeoverthelifecycleinordertoavoiddistortionoftheresults.(Typically,inthefirstandlastyearsofadultlife,consumptionisproportionallyhigherinrelationtoannualincomethaninthemiddleofthelifecycle.)Thosewhofavourthelifecycleapproachmaintainthatannualincomeishighlyvariablefromoneyeartothenext,whileconsumptionismoreuniformovertheyears.Theyarguethatthelevelofconsumptionisabetterindicatorofwell-being,andthusthatusingincomeoveralifetimeispreferabletousingannualincomeforthepurposesofassessingfiscalpolicies.Theyalsorefertopermanentincometheoriesandindicatethatusingan-nual incomeexaggeratesmeasurementsofregressivityandprogressivityofmanytaxes.Ontheotherhand,themainargumentsofthosewhofavourusingannualincomeare,first,thatsimulatinganincomeseriesoveralifetimeisveryuncertain,givenalltheassumptionsthatmustbemade;second,thatbothtaxpayersandpolit-icaldecisionmakersaremoreinterestedinthetaxprofileoverashortperiod;andthird,thatfrequentchangesinfiscalpolicyprovideanotherreasonfortheuseofannualincome.
Theresultsoffiscal impactstudiesareveryoftenshownastheratiobetweentaxespaidandincomeforeachincomegroup,calledtheaverageeffectivetaxrate.However, the choice of income used also has an effect on the results obtained.Shouldonlymarketincome(wagesandothersourcesofincome)beused,excludinggovernmenttransfers?Orshouldthenotionoftotalincomebeused,whichincludestransfers and thus considers the share of income directly under the control ofhouseholdsthatthegovernmentcollectsintaxes?Isitpreferabletoapplytheno-tionofdisposableincome,whichreducestotalincomebytaxespaid?Lastly,shouldthedefinitionof incomebeexpandedto includeavalue imputedtogovernmentspendingongoodsandservices,giventhelargenumberofassumptionsconcerningthedistributionofthevalueofsuchgoodsandservices?
ThemainstudiesonthefiscalimpactoftaxesinCanadahaveanalyzedtheeffectofalltaxesofallordersofgovernment.11Theyhavealsopresentedtheresultsac-cordingtogovernmentandbytypeoftax.Themethodologyusedinthesestudiesis
W.IrwinGillespie,andArndtVermaeten,“TaxIncidenceinCanada”(1994)42:2Canadian Tax Journal348-416;andMarcLee,Eroding Tax Fairness: Tax Incidence in Canada, 1990-2005(Toronto:CanadianCentreforPolicyAlternatives,2007).
10 See,forexample,JonathanR.KesselmanandRonCheung,“TaxIncidence,Progressivity,andInequalityinCanada”(2004)52:3Canadian Tax Journal709-89.
11 Ruggerietal.,supranote9;Vermaetenetal.,supranote9;Lee,supranote9;andArndtVermaeten,W.IrwinGillespie,andFrankVermaeten,“WhoPaidtheTaxesinCanada,1951-1988?”(1995)21:3Canadian Public Policy317-43.
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similareventhoughthechoicesmaderegardingthetypeofincomeandtaximputa-tionassumptionsvary.Despitethesedifferences,theresultssupportoneanother,tovaryingdegrees,andcanbesummarizedasfollows:
n Overall,Canada’staxsystemisprogressiveandresultsinsubstantialincomeredistributioninfavouroflow-incomegroups.
n Thefederal tax structure ismoreprogressive than the tax structureof theprovincesasawhole,thelatterbeing,accordingtothestudies,morepropor-tionalormildlyprogressive.
n Thepersonalincometaxistheonlytrulyprogressivetax.n Localtaxesaresomewhatproportionalorslightlyregressive.n Taxesonconsumergoods(salestaxesandothertaxes)areregressive.n Overall, using income after government intervention (taxes and transfers)
wouldimprovetheresultsobtainedintermsofprogressivity(moreprogres-siveorlessregressive).
Using 1981 data, Payette and Vaillancourt12 examined the impact by incomeclass of government revenue and expenditure (federal, provincial, and local) forQuebec.Theyprovided adetaileddescriptionof theirmethodof imputationofgovernmenttaxesandexpenditure.Theirresultsshowedthatin1981,threetypesoftaxeshadaregressiveimpact:thetaxoncorporateprofits(accordingtotheim-putationassumptions,thistaxcanalsobeneutral);thepropertytax;andtaxesongoods(indirecttaxes,customsduties,excisetaxesandduties,registrationandlicencefees,etc.).Ontheotherhand,incometaxandsocialsecuritytaxeswereprogressive.Turningtotheimpactofpublicspending,transfershad,notsurprisingly,aclearlyprogressiveimpact.And,whenpopulationwaschosenastheallocatorofspendingamongquintilesformanyspendingcategories,theotherspendingcategorieswerealsoprogressive,withtheexceptionofthedebtandotherspendingcategory.Over-all,PayetteandVaillancourtshowedthatin1981,inQuebec,taxationwasmildlyregressiveandgovernmentspendingwasprogressive.
The Regressive Aspect of Consumption Taxes
Unlikeincometax,whichhasaprogressivetaxscale(theraterisesasincomein-creases),consumptiontaxeshaveasinglenon-zerorate.Twotaxpayers,onelow-incomeandtheotherhigh-income,willpaythesameamountofGST-QSTonthepurchaseofanidenticalproduct.
Inaddition,theresearchonfiscalimpactdiscussedaboveisconsistentwithoneof themaincriticismsoften levelledatconsumption taxes,namely, that theyareregressive—thatis,lower-incomefamiliesspendalargershareoftheirincomeintaxesthanhigher-incomefamilies.
12 MichelinePayetteandFrançoisVaillancourt,“L’incidencedesrecettesetdépensesgouvernementalesauQuébecen1981”(1986)62:3L’Actualité économique409-41.
are consumption taxes regressive in quebec? n 469
Someauthorshavewrittenonthisaspectofconsumptiontaxation.Anoverviewofthisliteraturetendstoconfirm,insomerespects,theregressivenatureofcon-sumptiontaxesspecificallyorofindirecttaxationingeneral.
InastudyoftheredistributiveimpactofindirecttaxesinFrance,ForgeotandStarzec13concludethatindirecttaxationhasananti-redistributiveeffectthatcontrib-utestotheheighteningofinequalities.RuizandTrannoy14presentamicrosimulationmodeloftheredistributiveimpactsofindirecttaxation.Themodelconfirmsandquantifiestheregressiveimpactofvariousindirecttaxes—inparticular,excisedutiesontobacco,alcohol,andpetroleumproducts.RuizandTrannoyconcludethatin-directtaxesmakebutamarginalcontributiontoredistributiveobjectives.Intheirview,indirecttaxationshouldbeconsideredasa“budgetreservoir”fromwhichgov-ernmentscandrawtofundreformsofdirecttaxeswitharealredistributiveimpact.
Usingamicrosimulationmodel,Decosteretal.15 simulatea shift fromdirecttaxationtogreateruseofindirecttaxationinfiveEuropeancountries,keepinggov-ernmentrevenuesconstant.Thestudyshowsthattheregressiveaspectdependsonthedenominatorused.Iftheamountofindirecttaxespaidiscomparedasapro-portion of income, these taxes are regressive, but they are proportional or evenprogressiveasapercentageoftotalconsumptionspending.However,theyarestilllessprogressivethanotherformsoftaxation,suchastaxationofindividualorfamilyincome.
Asindicatedaboveinthesectiononfiscalimpact,manyauthorsarguethattheprogressiveorregressivenatureofindirecttaxesshouldbemeasured,notonthebasisof annual income, but rather using life cycle income. Caspersen and Metcalf,16Metcalf,17 and Athreya and Reilly18 have all shown that consumption taxes areregressiveonthebasisofannualincome,butbecomeproportionalorevenprogres-sivewhenthecalculationisbasedonlifecycle.Ontheotherhand,ChernickandReschovsky19contradicttheforegoingstudiesandaffirmthatconsumptiontaxesarealwaysregressive,regardlessofthetimehorizonconsidered.
13 Supranote1.
14 NicolasRuizandAlainTrannoy,“Lecaractèrerégressifdestaxesindirectes:lesenseignementsd’unmodèledemicrosimulation”(2008)413Économie et statistique21-46.
15 AndréDecoster,JasonLoughrey,CathalO’Donoghue,andDirkVerwerft,“HowRegressiveAreIndirectTaxes?AMicrosimulationAnalysisforFiveEuropeanCountries”(2010)29:2Journal of Policy Analysis and Management326-50.
16 ErikCaspersenandGilbertMetcalf,“IsaValueAddedTaxProgressive?AnnualVersusLifetimeIncidenceMeasures”(1994)47:4National Tax Journal731-46.
17 GilbertE.Metcalf,The National Sales Tax: Who Bears the Burden?CatoInstitutePolicyAnalysisno.289(Washington,DC:CatoInstitute,1997).
18 KartikB.AthreyaandDevinReilly,“ConsumptionSmoothingandtheMeasuredRegressivityofConsumptionTaxes”(2009)95:1Economic Quarterly75-100.
19 HowardChernickandAndrewReschovsky,“Yes!ConsumptionTaxesAreRegressive”(2000)43:5Challenge Magazine60-91.
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TurningtoCanada,ina1978study,Ruggeri20maintainedthatthedifferentem-piricalresultsfoundforCanadainvariousstudiesonconsumptiontaxescouldbeexplainedinpartbydifferencesinthedefinitionofincome(beforeoraftergovern-mentinterventionbytaxesandtransfers)andinthemethodofallocationofpaymentsoftaxesforthevariousincomegroups.Usingincomeaftertaxesandtransfers(aftergovernment intervention) and breaking down household spending according toStatisticsCanada’s1969surveyoffamilyexpenditures,21heconcludedthatprovin-cialsalestaxeswereproportional.
In Quebec, Vaillancourt and Berthiaume22 examined Quebec’s retail sales taxcomparedwithOntario’staxin1970foreconomicfamiliesaccordingto12incomegroups.TheyconcludedthatthesalestaxwasclearlyregressiveforallincomegroupsinOntario,butthatinQuebec,itwasroughlyproportionalinthefirst10groups,representing85percentoffamilies.VaillancourtandPoulaert23thenrepeatedtheexercise,butforalltheprovincesandfortwoyears,namely,1978and1982.Inthiscase, their resultsmeasured for aCanadianweighted average showed that retailsalestaxesweresomewhatprogressivein1978andregressivein1982.ThisresultalsoheldforQuebec,thoughwhenthelastincomegroupwasexcludedin1982,adegreeofproportionalitywasapparent,oratleastregressivitywasfairlylow.
However,itshouldbementionedthatthereisnostudydealingspecificallywiththeGSTortheQST.InthestudiesmentionedearlierontheCanadiantaxsystemasawhole,theeffectofconsumptiontaxesonincomehasbeenmeasured,butineverycase,eithervalue-addedtaxes(GST,QST)hadnotbeenimplemented,ortheywereincludedintheentiresetofindirecttaxes.Nonetheless,itisimportanttopointoutthatVermaetenetal.24indicatethattheregressiveaspectofindirecttaxesremainsdespitetheexistenceoftaxcredits,whileLee25specifiesthathiscalculationscon-cerningindirecttaxesdonottakethetaxcreditintoaccount,becauseheconsidersittobeatransferandthusincludesitinincome.However,headdsthatthiscreditoffsetstheregressiveaspectoftheGST.
Onemightask:Ifaspecificanalysisofconsumptiontaxes,eventakingintoaccountexistingtaxcredits,showsthattheyareregressive,isthatcauseforconcernsolongas the tax system as a whole remains progressive? As Chernick and Reschovsky
20 G.C.Ruggeri,“OntheRegressivityofProvincialSalesTaxationinCanada”(1978)4:3Canadian Public Policy364-72.
21 StatisticsCanada,Family Expenditures in Canada,catalogueno.62-535(Ottawa:StatisticsCanada,1969).
22 FrançoisVaillancourtandJacquesBerthiaume,“AComparativeAnalysisoftheIncidenceofRetailSalesTaxinOntarioandQuebec,1970”(1978)26:5Canadian Tax Journal596-604.
23 FrançoisVaillancourtandMarie-FrancePoulaert,“TheIncidenceofProvincialSalesTaxesinCanada,1978and1982”(1985)33:3Canadian Tax Journal490-510.
24 Vermaetenetal.,supranote9.
25 Lee,supranote9.
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observe,26theessentialthingistoensurethatthelesswelloffdonotbecomemoredisadvantagedwhenachangeinfiscalpolicyisimplemented.
Tools for Reducing or Eliminating the Regressive Effect of Consumption Taxes
Whileconsumptiontaxestendtoberegressivebynature,governmentcanintervenetoreduceorcompletelyoffset theirregressiveeffect.27Thethreemostcommonways toreduceregressivity for low-incomehouseholdsaremultiplerates,exclu-sions,andtaxcreditsorallowances.28
Multiple RatesImplementingmultiplerates,withlowerratesappliedtoeverydaygoodsandser-vicesandhigherratesappliedto“luxury”goodsandservices,obviouslyreducestheregressivenatureofconsumptiontaxes.Ofthe27memberstatesoftheEuropeanCommunity,Denmarkistheonlyonetouseasinglevalue-addedtaxrate.France,forexample,appliesratesof2.1percent,5.5percent,and19.6percent.29
Inthisregard,Bickley30indicatesthateconomistsopposemultipleratesbecauseoftheadministrativecoststheygenerateandtheireffectsontheneutralityofthetax.
NeitherQuebecnorCanadahasadoptedthisapproach,andbothapplyasingleconsumptiontaxrate.
ExclusionsThe regressive nature of consumption taxes obviously depends on the tax base.Oncecertaingoodsorservicesareexemptfromtax,itispossibletoreduceorelim-inate regressivity by excluding goods whose consumption represents a relativelylargershareofexpendituresbylower-incomehouseholds.Thiscanbedonebyex-cludingessentialgoods(foodandshelter,inparticular).
26 ChernickandReschovsky,supranote19.
27 Manyauthorsspeakofthepossibilityofreducingorcancellingtheregressiveaspect.See,inparticular,JeffreyM.Schaefer,“SalesTaxRegressivityUnderAlternativeTaxBasesandIncomeConcepts”(1969)22:4National Tax Journal516-27;Metcalf,supranote17;andKentOsburnZirlott,“AnalyzingSalesTaxRegressivityUsingConsumerExpenditureData:AThreeScenarioAnalysisforAlabama,”PhDdissertation(UniversityofAlabama,2007).
28 JamesM.Bickley,Value Added Tax: Concepts, Policy Issues, and OECD Experiences(Hauppauge,NY:Novinka,2003).
29 EuropeanCommission,TaxationandCustomsUnion,VAT Rates Applied in the Member States of the European Union(Brussels:EuropeanCommission,2011).
30 Supranote28.
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Forthesamereasonsmentionedfortheuseofmultiplerates,Bickleypointsoutthateconomistscriticizetheuseofexclusions.However,Schaefer31andDavies32haveshownthatexcludingfoodpurchasedforhomeconsumption(basicgroceries)fromthetaxbasecanreduceregressivityorincreaseprogressivity,dependingonthemeasureused.
QuebecandCanadausetheexclusionapproach.Manygoodsandservicesareeitherexemptorzero-rated(fortheQST,theGST,orboth).33Fromtheconsumer’sstandpoint,“exempt”and“zero-rated”meanthesamething—namely,applicationofazeroratetoagivenproductorservice—butforabusiness,theimpactdependsonwhichformofexclusionapplies.34Thereisamultitudeofexemptorzero-ratedgoods and services, including prescription drugs, certain transportation services,mosthealthservices,educationservices,andchild-careservices,aswellascertainspecificgoods(suchasdiapersandbooks)intheQSTsystem.
Obviously, shelter and basic groceries must be added to that list. Regardingshelter,thegovernmentacknowledgesthatitisanessentialneedandamajorcom-ponentofhouseholdconsumption.Asforgroceries,thegovernmentacknowledgesthegeneralviewamongtaxpayersthatbasicgroceriesshouldnotbetaxed.Inbothcases,thesemeasureswereincludedinrecognitionofthenegativeconsequencesofataxonrentalaccommodationandbasicgroceriesforlow-incometaxpayers.35
Tax Credits or AllowancesThethirdapproachdesignedtoattenuatetheeffectsofconsumptiontaxesforlow-incomehouseholdsistheintroductionoftransfermeasuresdirectedtothisgroupoftaxpayers.Thistypeofallowancecanconsistofataxcreditclaimedwhenfilinganannualtaxreturn,oraperiodicbenefit.Avariantofthisapproachistoallocateade-finedportionofconsumptiontaxrevenuestotransferstolow-incomehouseholds.
Bysimulating the implementationofa sales taxwitha taxcreditoruniversalrebate, Zirlott36 (for Alabama) and Burton and Mastromarco37 (for the United
31 Schaefer,supranote27.
32 DavidG.Davies,“ClothingExemptionsandSalesTaxRegressivity:Note”(1971)61:1The American Economic Review187-89.
33 Forexample,asdiscussedbelow,53percentofhouseholds’currentexpenditureinthelowestincomequintilehasnotbeentaxed.Theproportiondecreasesasincomeincreases,reaching33percentforthehighestincomequintile.
34 Thedifferenceisimportantforcompaniesthatmayormaynotclaiminputtaxrebatesorcreditsdependingonwhetherthesupplyiszero-ratedorexempt.
35 FinancesQuébec,Tax Expenditures: 2010 Edition(QuebecCity:FinancesQuébec,2011),atB.227-30.
36 Zirlott,supranote27.
37 DavidR.BurtonandDanR.Mastromarco,Emancipating America from the Income Tax: How a National Sales Tax Would Work,CatoInstitutePolicyAnalysisno.272(Washington,DC:CatoInstitute,1997).
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States)haveshownthatconsumptiontaxescanbecomeprogressiveforlow-incomeearners.
UnlikeEuropeancountries,whichdonotusethisapproach,QuebecandCanadahaveofferedthetaxcreditsincetheintroductionoftheGSTandtheQST.38Thefederal and Quebec governments allow individuals a refundable sales tax credit,dependingontheireconomicandfamilysituation.In1989,Canada’sministeroffinance,MichaelH.Wilson,wrote:
Canadaisinauniqueposition:ourextensiveexperiencewithrefundabletaxcreditsdeliveredthroughtheincometaxsystemensuresthatwewillbeabletooffsetthere-gressivitythatisinherentintaxingconsumption.39
Table 1 shows the parameters of the GST and QST refundable tax credits for2008,whilefigure1illustratestheamountsreceivedforacouplewithchildren.Itcanbeseenthattheamountobtainedvarieswidelydependingonfamilysituationandincome.However,onlythevalueofthefederalcreditdependsonthenumberofchildren.
Ifaconsumptiontaxthatisapplieduniformly(atthesamerateonallproductsandservices,regardlessofhouseholdsituation)imposesaheavierburdenonhouse-holdsthatarelesswelloff,threetoolscanbeusedtoreduceorreversetheregressiveimpactofthetax.QuebecandCanadamakeuseoftwoofthesetools—theexclusionofcertainbasicgoodsandservicesfromthetaxbase,andtheprovisionoftaxcreditsforhouseholdsthatarelesswelloff—bothofwhichclearlyaffectthedistributionoftheconsumptiontaxburdenamonghouseholds.Thatsaid,implementationofthesemeasuresmustbeoffsetfinanciallybyapplyingahighergeneralsalestaxrateifthegovernmentistomaintaintherevenuesitneedsfromtheimpositionofaconsump-tiontax.
Adocumentpublishedin1987bythefederalDepartmentofFinance,beforetheimplementationoftheGST,showedthatasalestaxwithoutarefundabletaxcreditwouldberegressive,butasalestaxwitharefundablecreditandsomeexemptionswouldbeprogressive.40
Itmaybeworthwhilenotonlytoexaminewhetherconsumptiontaxesarere-gressiveornot,andthushowtaxesarecollected,butalsotostudyhowgovernmentsusetaxrevenuesforpublicspending.Asdiscussedabove,refundablesalestaxcredits
38 InNewZealand,thereisasalestaxcredit,butitisrestrictedtofamilieswithdependentchildren.SeeIanDickinsonandDavidWhite,Tax Design Insights from the New Zealand Goods and Services Tax (GST) Model(Wellington,NZ:VictoriaUniversity,CentreforAccounting,GovernanceandTaxationResearchSchoolofAccountingandCommercialLaw,2008),at11.
39 Canada,DepartmentofFinance,Goods and Services Tax: An Overview(Ottawa:DepartmentofFinance,1989),at6.
40 Canada,DepartmentofFinance,Tax Reform 1987: Sales Tax Reform(Ottawa:DepartmentofFinance,1987),at13.
474 n canadian tax journal / revue fiscale canadienne (2011) 59:3
TABLE 1 Parameters of Refundable Tax Credits for the QST and GST, 2008
Maximum Reduction Rateof Cutoff amount threshold reduction threshold
dollars percent dollars
QSTSingleperson..................... 292 29,645 3 40,379Couple. . . . . . . . . . . . . . . . . . . . . . . . . . 348 29,645 3 43,245
GSTPersonlivingalone(including
workincomesupplement)a . . . . . . . . . 369 31,524 5 38,904Single-parentfamilywithonechild . . . 611 31,524 5 43,744Childlesscouple. . . . . . . . . . . . . . . . . . . 484 31,524 5 41,204Couplewithchildren
Onechild. . . . . . . . . . . . . . . . . . . . . 611 31,524 5 43,744Twochildren . . . . . . . . . . . . . . . . . . 738 31,524 5 46,284
Notes:TheamountsofGSTandQSTcreditsareindexedannually.ThecutoffthresholdfortheQSTcreditiscalculatedbyincludingthedeductionforworkersfrom$1,000perperson.
a Themaximumamountis$242,butthereisasupplementforapersonlivingalonewithaworkincomesupplement.Themaximumsupplementis$127andappliestoworkincomeinexcessof$7,851atarateof2percent.Accordingly,themaximumamountof$369isreachedatworkincomeof$14,200.Sources:CanadaRevenueAgencyandRevenuQuébec.
areinplacetoreducetheregressivenatureoftheGSTandtheQST,andmanyecono-mistsagreethatmostwealthredistributionoccursonthespendingside,andnotjustinhowtaxrevenuesarecollected.41
Measures of Progressivity
Therearenumerousmeasuresofprogressivity,althoughnoindicatorisuniversallyrecognized.42However,measuresofprogressivityaregenerallyoftwotypes:targetedorglobal.Atargetedmeasureofprogressivityiscalculatedforvariousspecifiedin-comegroupsandassistscomparisonofresultsfromonegrouptoanother.
Theaverageeffectivetaxrateisalocalmeasure.Ina1948study,MusgraveandThin43measuredtheriseinthisratebythechangeintaxpayablecomparedwiththechangeinincome.Thereisprogressivitywhentheaveragetaxrateisarisingfunc-tionofincome.Thistypeoflocalmeasureisextremelyuseful,eventhoughitmakes
41 BevDahlby,“RestructuringtheCanadianTaxSystembyChangingtheMixofDirectandIndirectTaxes,”inHerbertG.Grubel,Tax Reform in Canada: Our Path to Greater Prosperity(Vancouver:FraserInstitute,2003).
42 JohnNorregaard,“Progressivitédessystèmesd’impositionsurlerevenu”(Autumn1990)Revue économique de l’OCDE91-123.
43 RichardA.MusgraveandTunThin,“IncomeTaxProgression:1929-1948”(1948)56Journal of Political Economy498-514.
are consumption taxes regressive in quebec? n 475
FIGURE 1 Annual QST and GST Credits by Family Income for a Couple with Two Children, 2010
Dol
lars
Family income (dollars)
Source: Calculations by the authors.
0
200
400
600
800
1,000
1,200
Total creditsQST credit GST credit
75,
000
70,0
00
65,0
00
60,0
00
55,0
00
50,0
00
45,0
00
40,0
00
35,0
00
30,0
00
25,0
00
20,0
00
15,0
00
10,0
00
5,00
00
comparisonsbetweenjurisdictions,overtime,orbetweentwotypesoftaxationmoredifficultthanaglobalmeasure.(Aglobalmeasureanalyzestheoverallprogressivityorregressivityofataxstructure.)
Inadditiontotheaverageeffectivetaxrate,thereareothertargetedmeasures,includingaverysimpleoneproposedbyRuggeri.44Heanalyzedprogressivitybycomparingtheproportionoftotaltaxespaidbyhouseholdsinonequintilewiththeshareoftotalincomeofthesamequintile.Ifthetaxisdistributedproportionally,theindexwillbeequalto1.Morethan1forthelowerquintilesmeansthatthetaxisregressive,becausetheshareoftaxpaidbyhouseholdsinthelower-incomequintilesishigherthantheirshareofincome.AccordingtoRuggeri’sapproach,thetaxisprogressivewhentheindexforthelowerquintilesislessthan1whiletheindexfortheupperquintilesisgreaterthan1.
Foraglobalanalysisofprogressivity,aLorenzcurveanda taxconcentrationcurvecanbedrawnsidebyside.TheLorenzcurveshowsaggregatepopulationasa function of aggregate income. The tax concentration curve shows aggregatepopulationasafunctionofaggregatetaxespaid.Accordingly,ataxisprogressiveifat eachpointof aggregatepopulation (except atboth ends) theLorenz curve is
44 Ruggeri,supranote20.
476 n canadian tax journal / revue fiscale canadienne (2011) 59:3
abovethetaxconcentrationcurve,implyingthatthepercentageofthepopulationinquestionispayinglessthanitsshareofincome.45
THE ME THO D O LO GIC A L A PPROACH FO R DIS TRIBUTING THE WEIGHT O F CO NSUMP TIO N TA X E S
ThemainobjectiveofthisanalysisistoestimatethedistributionofconsumptiontaxesamongQuebechouseholds.Todoso,theamountofconsumptiontaxespaidbyhouseholdsmustfirstbedetermined.Itwillthenbepossibletodeterminetheirweightasaproportionofhouseholdincome.Thissectiondescribesthemethodo-logicalapproachused.
Survey of Household Spending
TheanalysismakesuseofStatisticsCanada’sSurveyofHouseholdSpending(SHS)for200846toestimateconsumptiontaxespaidinQuebec(QSTandGST).TheSHSprovidesdetailedinformationonspendingrelatingtoconsumptionofproductsandservicesbyhouseholdsineachprovinceofCanada.Householdspendingisbrokendownintomorethan260categories,withmanygroupings.Thesurveyalsogivestotal income, taxes paid, and the main social contributions paid by these samehouseholds.Themaingroupingsofconsumptionspendingin2008areasfollows:
n Foodn Sheltern Householdoperationn Householdfurnishingsandequipmentn Clothingn Transportationn Healthcaren Personalcaren Recreationn Readingmaterialsandotherprintedmattern Educationn Tobaccoproductsandalcoholicbeveragesn Gamesofchance(net)n Miscellaneousexpendituresn Investmentsinthehome:improvementsandalterations
45 Inparticular,Zirlott,supranote27;AbdelkrimAraar,SamiBibi,andJean-YvesDuclos,“Progressivity,VerticalandHorizontalEquity,”paperpresentedattheWorkshoponPovertyandSocialImpactAnalysisinSub-SaharanAfrica,Kampala,Uganda,November23-29,2009.
46 StatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009).
are consumption taxes regressive in quebec? n 477
Household TypeInthisanalysis,wewillusespendingbyhouseholdsratherthanspendingbyindivid-uals.47IntheSHS,ahouseholdisapersonorgroupofpersonsoccupyingadwelling.Accordingly,householdsconsistofcoupleswithorwithoutchildren,single-parentfamilies,andpersonslivingaloneorwithotherunrelatedpersons.AccordingtotheSHS,therewere3,351,040householdsinQuebecin2008.
Measure of Household IncomeHouseholdincomecanbemeasuredinmanyways.Forinstance,marketincomein-cludesallsourcesofhouseholdincomeexceptgovernmenttransfersandiscalculatedbeforetaxes.Total incomeincludesall sourcesof income, includinggovernmenttransfers.Lastly,after-taxincomeincludesallsourcesofincome,includinggovern-menttransfers,fromwhichincometaxissubtracted.
Tomeasuretheamountoftaxespaidbyhouseholdsasaproportionoftheirin-come,theanalysisusesthenotionofnetincome,definedasincomeafterpersonalincometaxesandaftersocialcontributions.AllthisinformationisdrawnfromtheSHS2008.48Netincomeisselectedforthisanalysisbecauseitistheincomeactuallyavailabletohouseholdsforconsumptionspending.
Breakdown of Households by IncomeTheSHSpresentshouseholdspendingbyincomequintile,meaningthattheSHSdataforthe3,351,040householdsaredividedintofiveequalgroups.Accordingly,theanalysiscantakeintoaccountthechangeinconsumptionaccordingtohouse-holdfamilyincome.Thefirstquintilereferstothegroupof670,210householdswiththelowestincome,whilethefifthquintilereferstospendingbythegroupof670,210householdswiththehighestincome.49In2008,thepopulationbreakdownresultsinthefollowingtotalincomethresholdsfortherespectivequintiles:
47 Itcanbearguedthathouseholdsizeshouldbetakenintoaccount.Forexample,theindividualsinafamilyoffourearning$20,000peryearmightbepoorerthanasingleindividualearning$15,000.Implementingthisapproachwouldinvolvecalculatinghouseholdincomeonaper-adult-equivalentbasis(usingahouseholdequivalencescaletoequivalizehouseholdsofdifferentsizes)andthenrerankinghouseholdsintofivequintilesonthisbasis.Thisstepislefttofurtherresearch.Ourapproach,althoughnotusedbyallstudies,iscommonintheliterature;asKesselmanandCheung,supranote10,at735,note,“[t]akingthehouseholdastheunitofobservationwithoutequivalizingisalsocommoninFINC[fiscalincidence]studies.”
48 NetincomeasdefinedintheSHS2008alsoincludes“othermoneyreceipts,”whichreferstoreceiptsnototherwiseincludedinincome,suchascashgifts,inheritance,orlifeinsurancesettlements.Winningsfromgamesofchancearealsoincludediftheyexceedtheamountspentongamesofchance.Forsimplicity,weusethisnetincomeconcept.
49 Formethodologicalquestions,thetotalofthehouseholdsofthesampleis10lessthantheadditionofthenumberofhouseholdsofeachquintile.Formoreinformation,seeStatisticsCanada,User Guide for the Survey of Household Spending, 2008,catalogueno.62FOO26M,at21.
478 n canadian tax journal / revue fiscale canadienne (2011) 59:3
1. First(lowest)quintile:$22,354orless 2. Secondquintile:$23,355-$39,143 3. Thirdquintile:$39,144-$61,389 4. Fourthquintile:$61,390-$94,700 5. Fifth(highest)quintile:$94,701ormore
Breakdown of Taxable Spending by QuintileTomeasuretheQSTandGSTpaidbyhouseholds,eachofthe260spendingcategor-iesoftheSHS2008wasanalyzedtodeterminewhetherornotitconsistedoftaxablegoodsandservices.50Table2showsthebreakdownoftaxableandnon-taxablespend-ingbyQuebechouseholdsineachquintilein2008,foreachofthemainconsumptiongroupingslistedabove.
ThelevelofdetailintheSHS2008,whilestilltoocoarse,isnonethelessadequatefor estimating taxable household consumption. To clarify how the taxable itemsweredetermined,thetextthatfollowsprovidesanexplanationofsomeofthemajorspendingitems,especiallythosethatrequiredalargernumberofmanipulations.
Spending on Food
Thesizeofhouseholdincomecertainlyhasaninfluenceontheproportionofthefamilybudgetallocatedtobasicnecessities,suchasfood.In2008,forhouseholdsinthelowestquintile,almost19percentoftotalspendingwasonfood,comparedwith9.5percentforhouseholdsinthehighestquintile—hence,theimportanceinthisstudyofestimatingthetaxableportionofsuchspending.Thetwomaincompon-entsoftheSHSinthefoodcategoryarefoodboughtinastoreandfoodboughtinarestaurant.Ofcourse,taxesarepaidonfoodboughtinarestaurant.However,forfoodboughtinastore,thetaxableandnon-taxableportionsmustbeestimated.
Quebec’s tax expenditures report indicates that in 2008, zero-rating of basicgroceriescost$1.2billioninforgoneQSTrevenue,51whichimpliestotalhouseholdspendingonnon-taxableproductsestimatedat$15.5billion.Themethodweusetocalculatethetaxableandnon-taxableportionsoffoodproductsboughtinastoreisshownbelow.AddingupthedatafromtheSHS2008forallquintiles,totalhouse-holdspendingonfoodboughtinastoreamountedto$20billion.Usingthisfigure,itispossibletoestimatethenon-taxableportionofspendingonfoodboughtinastorein2008at77.2percent.Tosimplifymatters,andbecausenothingallowsustoestimatevariationsbetweenhouseholds in spendingon food,whether taxableornot,thisproportionisappliedevenlytohouseholdsineachquintile,toarriveatthefiguresshownfor“Food”intable2.
50 Formoredetailsaboutthebreakdownoftaxableandnon-taxablespendinginthisarticle,e-maileitheroftheauthorsorcontacttheCanadianTaxFoundationlibrary(www.ctf.ca).
51 FinancesQuébec,Tax Expenditures: 2010 Edition(QuebecCity:FinancesQuébec,2011),atA.59.
are consumption taxes regressive in quebec? n 479
TAB
LE 2
Ta
xabl
e an
d N
on-T
axab
le H
ouse
hold
Spe
ndin
g, b
y In
com
e Q
uint
ile
and
Spen
ding
Cat
egor
y, Q
uebe
c, 2
008
L
owes
tqui
ntile
Se
cond
qui
ntile
T
hird
qui
ntile
Fo
urth
qui
ntile
H
ighe
stq
uint
ile
Taxa
ble
Non
-tax
able
Ta
xabl
eN
on-t
axab
le
Taxa
ble
Non
-tax
able
Ta
xabl
eN
on-t
axab
le
Taxa
ble
Non
-tax
able
do
llars
Food
....
....
....
....
....
.1,
191
2,45
61,
992
3,60
82,
575
4,40
33,
305
5,61
54,
644
7,19
3Sh
elte
r..
....
....
....
....
.97
95,
608
1,69
96,
442
2,33
07,
877
3,70
28,
838
6,81
011
,560
Hou
seho
ldo
pera
tion.
....
...
1,21
95
1,86
513
32,
072
204
2,72
932
43,
996
717
Hou
seho
ldfu
rnis
hing
s
and
equi
pmen
t..
....
....
.53
2ni
l1,
048
nil
1,46
8ni
l1,
796
nil
3,04
6ni
lC
loth
ing.
....
....
....
....
.86
6ni
l1,
343
nil
1,93
6ni
l2,
755
nil
4,93
8ni
lT
rans
port
atio
n..
....
....
...
1,54
739
74,
226
754
6,85
483
89,
225
1,05
513
,645
1,
444
Hea
lthc
are
....
....
....
...
198
833
146
1,35
922
82,
108
298
2,25
830
72,
686
Per
sona
lcar
e..
....
....
....
49
7ni
l78
8ni
l1,
006
nil
1,27
9ni
l1,
819
nil
Rec
reat
ion
....
....
....
....
73
7ni
l1,
708
nil
2,61
642
4,
111
118
6,99
619
2R
eadi
ngm
ater
ials
and
ot
her
prin
ted
mat
ter.
....
..
90
nil
173
nil
189
nil
271
nil
430
nil
Edu
catio
n...
....
....
....
..
68
252
73
269
69
217
163
486
366
1,22
7To
bacc
opr
oduc
tsa
nd
alco
holic
bev
erag
es..
....
..
674
nil
1,06
1ni
l1,
292
nil
1,70
0ni
l2,
353
nil
Gam
eso
fcha
nce
(net
)...
....
ni
l10
2ni
l27
4ni
l27
0ni
l21
3ni
l28
4M
isce
llane
ous
expe
nditu
res.
..
74
137
260
319
320
583
274
822
556
1,48
2In
vest
men
tsin
the
hom
e:
impr
ovem
ents
and
al
tera
tions
...
....
....
....
10
0ni
l79
3ni
l1,
924
nil
2,69
8ni
l5,
106
nil
Tota
l...
....
....
....
....
..
8,77
29,
790
17,1
75
13,1
58
24,8
79
16,5
42
34,3
06
19,7
29
55,0
12
26,7
85
Not
e:A
por
tion
ofta
xabl
esp
endi
ngin
clud
ess
pend
ing
subj
ecto
nly
toG
ST.I
tcon
sist
sof
dia
pers
,boo
ks,a
ndto
bacc
oin
the
pers
onal
car
e;r
eadi
ngm
ater
ials
an
dot
her
prin
ted
mat
ter;
edu
catio
n;a
ndto
bacc
opr
oduc
tsa
nda
lcoh
olic
bev
erag
esc
ateg
orie
sin
the
Surv
eyo
fHou
seho
ldS
pend
ing.
Ith
asb
een
incl
uded
in
our
cal
cula
tion
ofta
xes
paid
.So
urce
:Sta
tistic
sC
anad
a,S
urve
y of
Hou
seho
ld S
pend
ing,
200
8(O
ttaw
a:S
tatis
tics
Can
ada,
200
9),a
ndc
alcu
latio
nsb
yth
eau
thor
s.
480 n canadian tax journal / revue fiscale canadienne (2011) 59:3
Calculation of the non-taxable portion of spending on food bought in a store, Quebec, 2008Householdspending,
foodpurchasedfromstores . . . . . . . .$5,983a×3,351,040b=$20,049.3million
(A)
Taxexpenditures,basicgroceries . . . . . $1,161million/7.5%c=$15,480million (B)
Spendingonnon-taxedproductsasapercentageoftotalspendingonfoodpurchasedfromstores . . . . . .
77.2%
(B/A)
a Averageperhousehold.bTotalnumberofhouseholds.c ForgoneQSTrevenue÷QSTrate(2008)=valueofnon-taxedproducts.
Sources:StatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andcalculationsbytheauthors.FinancesQuébec,Tax Expenditures: 2010 Edition(QuebecCity:FinancesQuébec,2011);andcalculationsbytheauthors.
New Home Purchases
Concerningspendingonshelter,newhomepurchasesarenotincludedintheSHSbecausetheyarenotconsideredcurrentspending.Forinformationpurposes,wenotethatitispossibletoestimatethatonlyabout1.6percentofQuebechouseholdspurchasedanewhomein2008.52Estimatesofsuchpurchasescanbemadefromthevalueofresidentialbuildingpermits.53Sincethesepermitsamountedto$8.9billioninQuebecin2008,taxespaidwouldrepresent$445millioninGSTand$701mil-lioninQST.54However,purchasersofnewhomescanreceivepartialrebatesofGSTandQST,dependingonthevalueofthepurchase.55Thenetamountoftaxespaidisobtainedbysubtractingtheestimatedtaxrebates.Thisamount is thenallocatedamongthequintiles,usingtheallocationformortgagepaymentsshownintheSHS2008.
Government Revenues Derived from the QSTTojudgetheaccuracyoftheestimateoftaxescollectedusingtheSHS2008,theQSTrevenuecollectedbytheQuebecgovernmentin2008wasreconciledwiththere-sultsobtainedfromthemethodologicalapproach.Table3showstheconsistencyoftheexercisebyreconstitutingtotalQSTreceipts.Italsoindicatesthattheestimatesshownintable2forthevariousSHSspendingcategoriestogetheraccountforabout70percentoftheQSTcollectedbytheQuebecgovernment.
52 Ourcalculations,usingStatisticsCanada,CANSIMdatabasetables026-0001and027-0009,andtheSHS2008.
53 Usingthevalueofresidentialbuildingpermitsmeansthatweassumethatallbuildingpermitsissuedin2008ledtoasalein2008.Weknowthatisincorrect(somesalesin2008werefor2007permits,andsome2008permitswillresultinsalesin2009),butweuseitasaproxy.
54 InstitutdelaStatistiqueduQuébec,Principaux indicateurs économiques — Québec: Niveaux annuelles(www.stat.gouv.qc.ca/princ_indic/publications/indicat_ANNU.pdf ).
55 Tax Expenditures: 2010 Edition,supranote51,atA.59andB.232.
are consumption taxes regressive in quebec? n 481
The Survey of Labour and Income Dynamics
QuebechouseholdspayQSTandGSTontheirpurchases,andsomeofthemreceiverefundabletaxcreditsfortheQSTand/ortheGST.However,theSHSissilentontheallocation of GST and QST credits among households. To estimate the averageamountofrefundabletaxcreditsobtainedbyeachquintile,simpleapplicationoftherulesforcalculatingthesecredits,asdescribedearlier(seetable1andfigure1),isnotpossible.Variationsinfamilysituationwithineachquintilepreventthecalculationofaveragecreditsperquintile.Inaddition,itmayseemself-evidentthathouseholdsintheupperincomequintileswouldnotreceiveGSTorQSTcredits;however,someindividualsinthosehouseholdsmayqualifyforcredits—forexample,anadultstudent
TABLE 3 Reconciliation of QST Receipts, 2008
Receipts Revenue
$ millions
Totalreceipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,188
QSTpaida. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,378NetQSTpaidonnewresidentialdwellingsb. . . . . . . . . . . . . . . . . . . . . . . . . . 650NetQSTpaidbypublicserviceorganizationsc . . . . . . . . . . . . . . . . . . . . . . . . 401NetQSTpaidbymunicipalitiesd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470QSTnotrecoveredonexemptgoodsandservicese . . . . . . . . . . . . . . . . . . . . . 1,207
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,106
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82%difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9%
a Thisamountisderivedfromthebreakdownoftaxableandnon-taxablegoodsandservicesshownintable2.
bResidentialbuildingpermitsin2008amountedto$8.9billion.Accordingly,theQSTpaidrepresented$702million,fromwhichQSTrebatesof$52millionaresubtracted.
c Publicserviceorganizations(charities,schools,hospitals,etc.)paytheQSTbutobtaintaxrebatesatveryspecificrates(50percentforcharities,47percentforschools,and51.5percentforhospitals).Accordingly,withthehelpofQuebectaxexpendituredata,whichshowstheamountofrebatespaidtopublicserviceorganizationsandtherebaterates,weareabletoobtainthenetamountofQSTpaid.
dThisamountisanestimatebasedoninformationobtainedfromtheministèredesAffairesmunicipales.
eSomegoodsandservicesareexemptfromtax(rent,forexample),buttaxablegoodsandservicesareconsumedasinputsinthedeliveryofsuchgoodsandservices.Forinstance,theownerofanapartmentbuildingpaysfortaxableservicesbutdoesnotchargetaxontherent.ToestimatetheamountofQSTnotcollectedonexemptgoodsandservices,wecalculated,againusingtheSurvey of Household Spending, 2008,theamountofQSTthatwouldhavebeenpaidhadtheynotbeenexempt.Wethensubtractedthetaxexpenditurefromtheamountobtained.Sources:CalculationsbytheauthorsbasedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009);FinancesQuébec,Tax Expenditures: 2010 Edition(QuebecCity:FinancesQuébec,2011);andinformationprovidedbytheministèredesAffairesmunicipales.
482 n canadian tax journal / revue fiscale canadienne (2011) 59:3
livingwithhishigh-incomeparents.Chawla56estimatedthatone-thirdoffamilieswithanannualincomeof$100,000ormorereceivedaGSTcreditin2003.Forthisreason,weuseStatisticsCanada’sSurveyofLabourandIncomeDynamics(SLID)toextractthevalueofaveragetaxcreditsperquintile,andthustocalculatenettaxespaidperquintile.57
CO NSUMP TIO N TA X ATIO N O F HO USEHO LDS IN 20 0 8
With taxableandnon-taxable spendingallocatedamongQuebechouseholdsac-cordingtoincomequintile,itisnowpossibletoassesstheresultsobtainedagainstthewidespreadperceptionthatconsumptiontaxesareregressive.
Breakdown of Consumption Taxes
Whiletable2showsthebreakdownbetweentaxableandnon-taxablespendingbasedontheSHS2008,table4showstheamountofGSTandQSTpaidperhouseholdineachincomequintilebasedonaveragespending.Totalconsumptiontaxespaidvaryfrom$1,012forahouseholdinthelowestquintileto$6,880forahouseholdinthehighestquintile.However,theseamountsdonottakeintoaccountsalestaxcreditsreceivedbysomehouseholds.Asdiscussedearlier,58thesecreditswereimplementedbythefederalandQuebecgovernmentswhentheGSTandQSTwerefirstintro-ducedinordertooffsettheadditionalburdenforthemostdisadvantaged.
Nettaxespaidarethencalculatedtakingtherefundablecreditsofeachquintileintoaccount.59Forthelowestquintile,refundablecreditsrepresent60.6percentofall consumption taxespaid.Thispercentage falls to34.3percent for the secondquintile,9.9percentforthethird,4.75percentforthefourth,andlastly,2.6percentforthehighestquintile.
56 RajK.Chawla,“TheGSTCredit”(2006)7:6Perspectives on Labour and Income13-21.
57 StatisticsCanada,Survey of Labour and Income Dynamics(Ottawa:StatisticsCanada,2005,2006,2007,and2008).Ofcourse,itwouldhavebeenpreferabletouseonesurveytoextractallthedatausedinthisstudy,buttheSHSprovidesnoinformationontaxcreditsgrantedtohouseholdsofeachquintile.However,weareassuredthatthetwosurveysarecompatible.Whilethematchingbetweenthemisnotperfect,in2007,fromonesurveytotheother,thedifferencesintheupperlimitsofthequintilesandtheweightednumberofhouseholdsdifferonaveragebyonly6percent.WeconsiderthatthesedifferencesmakeitnotunreasonabletousetheGSTandQSTcredits(informationdrawnfromtheSLID)andapplythemtothequintilestakenfromtheSHS.
58 Seesupranote39andtherelatedtext.
59 TheGSTcreditisseparatelyidentifiedintheSLID.WithregardtotheQSTcredit,theSLIDincludesdatafor“provincialtaxcredits,”inwhichtheQSTcreditisdominant,butitalsoincludesothercredits.Thus,forallhouseholdsthathadaGSTcredit,wedeterminethevalueoftheQSTcreditusingthesameweightingasthatofthe“provincialtaxcredits”inordertoobtainthecostoftheQSTcreditin2008($505million).FromJuly2011,theQSTcreditistobecombinedwithtwoothercreditstoformthesolidaritytaxcredit.But,forthisstudy,itispossibletoisolatetheportion“QSTcredit.”
are consumption taxes regressive in quebec? n 483
Accordingly,takingtaxcreditsintoaccount,thedatashowthatahouseholdinthelowestquintilepaidanaverageof$398innettaxes.Thisamountrisesfromquintiletoquintile,reaching$6,704onaverageforahouseholdinthehighestquintile.
Byaddingthetotaltaxesandtotalnettaxespaidforallquintiles,wecancalculatetheshareoftaxespaidbyeachquintile.Figure2showsthathouseholdsinthelow-estquintile,whichaccountfor20percentofhouseholds,paidroughly6percentoftotaltaxesandroughly3percentofnettaxespaidin2008.Thisproportionrisesfromonequintiletothenext,upto40percentoftotaltaxesand44percentofnettaxesforthehighestquintile.
Whileitisstilltooearly,onthissimplebasis,toruleontheregressiveorpro-gressivenatureofconsumptiontaxes,table4andfigure2makeitpossibletostateataminimumthattheamountoftotalandnettaxespaidrisesappreciablyfromonequintiletothenext,withtheresultthatthefirstthreequintilespaylessthantheirweightasaproportionoftotalhouseholds,whilethesituationisthereverseforthetwoupperquintiles,whichtogetherpayover70percentofnettaxespaid.
Are Consumption Taxes in Quebec Truly Regressive?
Usingthedatapresentedabove,wecannowdealwiththequestionoftheprogres-sivityorregressivityofconsumptiontaxesforQuebechouseholds.Itwillthenbe
TABLE 4 Consumption Taxes Paid by Households, by Income Quintile, Quebec, 2008
Lowest Second Third Fourth Highest quintile quintile quintile quintile quintile
dollars
Spendingbyhouseholds(includingGSTandQST)a . . . . 9,110 17,938 27,249 37,839 61,307
QSTpaidb . . . . . . . . . . . . . . . . . . . 610 1,212 1,864 2,588 4,212GSTpaidb. . . . . . . . . . . . . . . . . . . 402 79 1,190 1,650 2,668
Totaltaxespaid . . . . . . . . . . . . . . . 1,012 2,002 3,054 4,238 6,880RefundableGSTcredit . . . . . . . . . (353) (432) (213) (131) (119)RefundableQSTcredit . . . . . . . . . (260) (255) (88) (59) (58)
Totalrefundablecreditsc . . . . . . . . (614) (687) (301) (190) (176)
Totalnettaxespaidc . . . . . . . . . . . 398 1,315 2,752 4,049 6,704
a ComprisestaxablespendingfromtheSurvey of Household Spending, 2008,plusanamountthatwehaveestimatedforthepurchaseofnewhomes.Asnotedintable3,taxablespendingincludesitemsthatarenotsubjecttoQST(books,diapers,andtobacco).Thisisreflectedinthecalculationoftaxespaid.
bIncludesthenettaxonnewhomes.c Totalsmaynotaddbecauseofrounding.
Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).
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possibletoinvalidatethepositionthatlower-incomehouseholdsallocatealargershareoftheirincometoconsumptiontaxesthanhigh-incomehouseholds.
Tax Concentration CurveAsdescribedearlier,itispossibletomeasuretheprogressivityofaformoftaxationbydrawingaLorenzcurveandataxconcentrationcurvesidebyside.Thismeasureindicatesthatiftaxesarebetterdistributedthanincome,thiscanonlybeachievedbywhatiscalledaprogressivetax.Accordingly,ataxisprogressiveifateachpointof aggregatepopulation, theLorenz curve is above the tax concentration curve,implyingthatthepercentageofthepopulationinquestionispayinglesstaxasaproportionofitsshareofincome.
Figure3 shows the twocurves for consumption taxes (QSTand GST)paid inQuebecin2008.Theleftpartofthefigureshowsthatwithouttaxcredits,QSTandGSTareproportionaltaxes.Intherightpart,theconcentrationcurveofnettaxespaidliesintheprogressivityzonebybeingbeneaththeLorenzcurveateachpoint.
Index of the Share of Taxes as a Proportion of the Share of IncomeAsindicatedinourearlierdiscussionofmeasuresofprogressivity,ifataxisdistrib-utedproportionally,theindexoftheshareoftotaltaxespaidtotheshareoftotalincomeforallhouseholdsinaquintilewillbeequalto1.AccordingtoRuggeri’sapproach,ataxisprogressivewhentheindexforthelowerquintilesislessthan1
FIGURE 2 Share of Consumption Taxes Paid by Income Quintile, Quebec, 2008
Total taxes
Lowest quintile5.9%
Second quintile11.7%
Lowest quintile2.6% Second quintile
8.6%
Fourth quintile24.7%
Thirdquintile17.8%
Highestquintile40.0%
Fourthquintile 26.6%
Thirdquintile18.1%
Highestquintile44.0%
Net taxes
Source: Calculations by the authors, based on Statistics Canada, Survey of Household Spending, 2008 (Ottawa: Statistics Canada, 2009), and Survey of Labour and Income Dynamics, 2008 (Ottawa: Statistics Canada, 2010).
are consumption taxes regressive in quebec? n 485
FIGURE 3 Lorenze Curve and Concentration Curve of Total and Net Consumption Taxes Paid, Quebec, 2008
Source: Calculations by the authors, based on Statistics Canada, Survey of Household Spending, 2008 (Ottawa: Statistics Canada, 2009), and Survey of Labour and Income Dynamics, 2008 (Ottawa: Statistics Canada, 2010).
Agg
rega
te o
f net
taxe
s pai
d or
net
inco
me
(%)
0 20 40
Aggregate population (%)
Total taxes
Net taxes
Concentration (aggregate total taxes paid)Lorenz (aggregate net income)
60 80 100
Agg
rega
te o
f net
taxe
s pai
d or
net
inco
me
(%)
0 20 40
Aggregate population (%)
Concentration (aggregate net taxes)Lorenz (aggregate net income)
60 80 100
Progressivity zone
0
20
40
60
80
100
0
20
40
60
80
100
486 n canadian tax journal / revue fiscale canadienne (2011) 59:3
whiletheindexfortheupperquintilesisgreaterthan1.Figure4showsthisindexfortotalandnetconsumptiontaxespaidbyQuebechouseholds.Intheleftpartofthefigure,thetotaltaxespaid(QSTandGSTbeforetaxcredits)areproportional.Intherightpart,forthelowestandthesecondquintiles,theshareofnettaxespaidisbelowtheshareofincome,whiletheoppositeholdsfortheotherthreequintiles.So,giventheindexcomputedfromnettaxes,wecanconcludethatinQuebeccon-sumptiontaxesareprogressive.
Measurement of the Effective Consumption Tax RateLastly,progressivityispresentiftheeffectiverateofconsumptiontaxrisesbetweentwosituations,suchthatthechangeintaxesexceedsthechangeinincome.Figure5showstheaverageeffectivetaxrateforeachquintile,representingtheshareofnetincomethathouseholdsinthatquintileallocatetotaxespaid,withandwithouttaxcredits. The lowest quintile had an average effective consumption tax rate of6.4percentwithouttaxcreditsand2.5percentincludingtaxcredits.Theaverageeffectiveraterisessignificantlybetweenthelowestandthesecondquintilesbeforebecomingmoreproportional,withaslightdeclineforthehighestquintile.
Overall,consumptiontaxesinQuebecareproportionalwithouttaxcreditsandprogressivewithtaxcredits.
Fortheremainderofthisanalysis,wewillusetheeffectivetaxratetoillustrateprogressivityinconsumptiontaxesinQuebec.
Table5reportstheeffectiveGSTandQSTratesforeachincomequintile,beforeandaftertakingtherespectivetaxcreditsintoaccount.Itshowsthatbeforetaxcred-its,bothtaxesareroughlyproportional,whileaftertaxcredits,theyareprogressive.
FAC TO R S O F PRO GRE SSI V IT Y O F CO NSUMP TIO N TA X E S IN QUEBEC
NowthatwehavefoundadegreeofprogressivityforconsumptiontaxespaidinQuebec,itisusefultoattempttoidentifyitssource.Forthisexercise,wefocusinparticularontwomeasures—thezero-ratingofbasicgroceriesandtheprovisionofrefundabletaxcredits—andseparatelycalculatetheireffectontheeffectivecon-sumptiontaxrateforeachquintile.
Table6showsthatthezero-ratingofbasicgroceriesisofgreaterbenefittoallincomequintileswhilethetaxcreditsaremorefocusedonhouseholdsinthelowestquintile.In2008,the$1.9billionallocatedtothezero-ratingofgroceriesreducedthe effective tax rate of the lowest quintile (before tax credits) by 2 percentagepoints.Ontheotherhand,theGST-QSTcreditscost$1.4billion,andtheireffectontheeffectiverateofthelowestquintilewastwiceasgreat—thatis,areductionof3.9percentagepoints.TheGST-QSTrefundablecreditsthusprovetobecrucial.Withoutthem,theeffectiveconsumptiontaxrateofthetwohighestquintilesde-creases,relativetothelowerquintiles.
Zero-ratingofbasicgroceriesandrefundableGST-QSTcreditsgiverisetocostsforeachgovernment.In2008,zero-ratingofbasicgroceriescosttheQuebecgov-ernment$1.2billion,andtheportionofthefederalcostofthismeasureattributable
are consumption taxes regressive in quebec? n 487
FIGURE 4 Index of the Share of Consumption Taxes Paid as a Proportion of the Share of Income, by Income Quintile, Quebec, 2008
Total taxes
0.911.03 1.03 1.02 0.98
Net taxes
Source: Calculations by the authors, based on Statistics Canada, Survey of Household Spending, 2008 (Ottawa: Statistics Canada, 2009), and Survey of Labour and Income Dynamics, 2008 (Ottawa: Statistics Canada, 2010).
Highestquintile
Fourthquintile
Thirdquintile
Secondquintile
Lowestquintile
0.40
0.76
1.05 1.10 1.08
Highestquintile
Fourthquintile
Thirdquintile
Secondquintile
Lowestquintile
FIGURE 5 Effective Combined Consumption Tax Rates, With and Without Tax Credits, for Each Income Quintile, Quebec, 2008
Source: Calculations by the authors, based on Statistics Canada, Survey of Household Spending, 2008 (Ottawa: Statistics Canada, 2009), and Survey of Labour and Income Dynamics, 2008 (Ottawa: Statistics Canada, 2010).
Eff
ectiv
e ta
x ra
te (%
)
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Highestquintile
Fourthquintile
Thirdquintile
Secondquintile
Lowestquintile
6.4
2.5
7.3
4.8
6.66.9 6.7
7.3 7.2 6.9
With tax credits Without tax credits
toQuebecamountedto$0.8billion.TheGSTandQSTcreditsgeneratedrevenueshortfallsin2008of$836millionand$500millionrespectively.Table7allocatesthesecostsamongthequintiles.Itcomesasnosurprisethatthelargestshareofthetaxcredits(65.8percent)goestothetwolowestquintiles.However,thebenefitsfromzero-ratingbasicgroceriesareenjoyedtoamuchmoresubstantialdegreebythetwohighestquintiles.Thus,evenifgovernmentschosetozero-ratebasicgroceries
488 n canadian tax journal / revue fiscale canadienne (2011) 59:3
inordernottopenalizelow-incometaxpayers,thecostforthetwotopquintilesissignificantlyhigher,at55percentversus26percentforthetwolowestquintiles.
IMPAC T O F CH A NGE S TO G S T A ND QS T R ATE S
ConsideringtherecentreductionsintheGSTrateandrecentandforthcomingin-creasesintheQSTrate,itisusefultoanalyzetherepercussionsofthesechangesontheeffectiveconsumptiontaxrateforeachincomequintile.Fromthisanalysis,wecan observe which quintiles benefit from a reduction in their effective rate andwhichquintilesexperienceanincreaseintheirrateinthewakeofchangestoGSTandQSTrates.Inthecalculationsthatfollow,weusetheeffectivetaxratesafterrefundableGST-QSTcredits.
TABLE 6 Sensitivity of Effective Consumption Tax Rates to the Zero-Rating of Basic Groceries and to GST-QST Credits, by Income Quintile, Quebec, 2008
Lowest Second Third Fourth Highest quintile quintile quintile quintile quintile
percent
Withoutzero-ratingofbasicgroceriesandwithoutcredits . . . 8.4 9.0 8.7 8.5 7.8
WithoutrefundableQSTandGSTcredits . . . . . . . . . . . . . 6.4 7.3 7.3 7.2 6.9
Realaverageeffectiverates. . . . . . . 2.5 4.8 6.6 6.9 6.7
Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).
TABLE 5 Effective GST and QST Rates for Each Income Quintile, Quebec, 2008
Lowest Second Third Fourth Highest quintile quintile quintile quintile quintile
percent
BeforetaxcreditsGST . . . . . . . . . . . . . . . . . . . . . 2.6 2.9 2.8 2.8 2.7QST . . . . . . . . . . . . . . . . . . . . . 3.9 4.4 4.5 4.4 4.2
Total . . . . . . . . . . . . . . . . . . . . . 6.5 7.3 7.3 7.2 6.9
AftertaxcreditsNetGST. . . . . . . . . . . . . . . . . 0.3 1.3 2.3 2.6 2.6NetQST. . . . . . . . . . . . . . . . . 2.2 3.5 4.2 4.3 4.2
Total . . . . . . . . . . . . . . . . . . . . . 2.5 4.8 6.6 6.9 6.7
Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).
are consumption taxes regressive in quebec? n 489
The Reductions in the GST Rate in 2006 and 2008
ThefederalgovernmentreducedtheGSTratefrom7percentto6percentonJuly1,2006andto5percentonJanuary1,2008.Sincethesereductionstookeffectonly18 months apart, we have assumed that household spending patterns were un-changedforeachquintile.Consequently,theanalysisusestheSHS2008dataandtheGSTratesinforcein2005,2006,2007,and2008.For2006,sincetheGSTratewasreducedonJuly1,aweightedrateof6.5percentisused.ConcerningtherefundableGSTcredit,sinceitsparameterswerenotchangeddespitetheratereductions,itsvalueisnotchangedinourcalculations.
Table8showsthechangeintheeffectiveconsumptiontaxrateforeachquintilefrom2005through2008.Whiletheeffectiverateofeachquintiledeclined, it ispossibletonotethatinproportionalterms,thefirstquintilebenefitedmostfromtheGSTreduction.Thisresultcanbeexplainedbythefactthat,whereastheGSTratewasreduced,theGSTcreditwasleftunchanged.
The Increases in the QST Rate in 2011 and 2012
Asdiscussedearlier,theQSTrateincreasedto8.5percentonJanuary1,2011,andistoincreaseagainto9.5percentonJanuary1,2012.Sincetherearenodataprojectinghousehold spending, we again assume that household spending patterns remainunchanged.Consequently,theanalysisusestheSHS2008dataandtheQSTratesinforce,orexpectedtobeinforce,in2008through2010,2011,and2012.ConcerningtherefundableQSTcredit,sinceitsparameterswillberaisedateachincreaseintheQSTrate,theannouncedincreasesinthecreditareincorporatedintotheanalysis.Table9showsthattheeffectiverateofeachquintilewillrise,buttheincreasewillbesmallestforthelowestquintile,thankstotheincreaseinthesolidaritytaxcredit.60
TABLE 7 Cost of GST-QST Credits and of Zero-Rating of Basic Groceries, Allocated by Income Quintile, Quebec, 2008
Lowest Second Third Fourth Highest All quintile quintile quintile quintile quintile households
$ millionsRefundabletaxcredit. . . . . 414 464 205 130 122 1,336
QST . . . . . . . . . . . . . . . 178 175 62 43 42 500GST . . . . . . . . . . . . . . . 237 289 143 88 79 836
Zero-ratingofbasicgroceries. . . . . . . . . . . . . 206 302 369 470 603 1,950
QST . . . . . . . . . . . . . . . 123 181 221 282 362 1,170GST . . . . . . . . . . . . . . . 82 121 148 188 241 780
Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).
60 Asnotedearlier,theQSTcreditwillbepartofthesolidaritytaxcredit.Inthesolidaritycredit,however,wecanisolatetheQSTcreditcomponent.Inourcalculations,weconsideronlythiscomponent.
490 n canadian tax journal / revue fiscale canadienne (2011) 59:3
TABLE 8 Changes in Effective Consumption Tax Rates, by Income Quintile, Quebec, 2005-2008
Percentagechange 2005 2006 2007 2008 2008-2005Quintile (1) (2) (3) (4) (4-1)/(1)
percent
Lowest. . . . . . . . . . . . . . . 3.6 3.3 3.1 2.5 −30Second. . . . . . . . . . . . . . . 6.0 5.7 5.4 4.8 −20Third. . . . . . . . . . . . . . . . 7.7 7.5 7.2 6.6 −15Fourth . . . . . . . . . . . . . . . 8.1 7.8 7.5 6.9 −14Highest . . . . . . . . . . . . . . 7.8 7.6 7.3 6.7 −14
Note:QSTrate:7.5percent(allyears).GSTrate:2005,7.0percent;2006,6.5percent(weightedaverage);2007,6.0percent;2008,5.0percent.Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).
Changes in the Combined GST-QST Rate, 2005-2012
ThecombinedGST-QSTratewillreach14.98percentin2012,almostrestoringtheratethatappliedin2005(15.03percent).However,onecannotsimplysaythatthisisareturntosquareone,andconcludethatthisisequivalenttoatransferofconsump-tiontaxpointsfromthefederalgovernmenttotheQuebecgovernment.Table10comparestheeffectivetaxrates,byquintile,forconsumptiontaxesin2005and2012(projected).Itshowsalargedropintheeffectiverateforthelowestquintileandasignificantdropforthesecond.Fortheotherthreequintiles,in2012thesituationeffectivelyrevertstowhatitwasin2005.
TABLE 9 Changes in Effective Consumption Tax Rates, by Income Quintile, Quebec, 2008-2012
Percentagechange 2008-2010 2011 2012 2012-2008Quintile (1) (2) (3) (3-1)/(1)
percent
Lowest. . . . . . . . . . . . . . . . . . . . . . . 2.5 2.6 2.7 7Second. . . . . . . . . . . . . . . . . . . . . . . 4.8 5.1 5.5 15Third. . . . . . . . . . . . . . . . . . . . . . . . 6.6 7.1 7.6 15Fourth . . . . . . . . . . . . . . . . . . . . . . . 6.9 7.5 8.0 16Highest . . . . . . . . . . . . . . . . . . . . . . 6.7 7.3 7.8 16
Note:ActualandannouncedQSTrates:2008-2010,7.5percent;2011,8.5percent;2012,9.5percent.GSTrate:5percent(allyears).Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).
are consumption taxes regressive in quebec? n 491
TABLE 10 Effective Consumption Tax Rates, by Income Quintile, Quebec, 2005 and 2012
Percentagechange 2005 2012 2012-2005Quintile (1) (2) (2-1)/(1)
percent
Lowest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 2.7 −25Second. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 5.5 −8Third. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7 7.6 −2Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 8.0 −1Highest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8 7.8 0
Note:QSTrates:2005,7.5percent;2012,9.5percent.GSTrates:2005,7.0percent;2012,5.0percent.Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).
CO NCLUSIO N
Areviewoftheliteratureleadstothegeneralconclusionthatconsumptiontaxesareregressive.However,itisacknowledgedthatgovernmentshavetoolsavailabletomitigateorevenreversethissituation.InthewakeoftherecentreductionsintheGSTrateandtheannouncementsofincreasesintheQSTrate,wewantedtoassesshowtheGST-QSTburdenisdistributedforQuebechouseholds.
Usingdata fromtheSHS2008,wehaveclassifiedoverallcurrent spending inQuebeconthebasisofitstaxableornon-taxablestatus.Thesubsequentanalysis,usingwell-documentedmethodologies,showsthebreakdownofnetconsumptiontaxespaidbyhouseholdsgroupedintoincomequintiles,anddeterminestheeffect-iveconsumptiontaxrateforeachquintile.Householdsizeisnottakenintoaccountintheanalysis;thisislefttofutureresearch.61
WhilethereisnostudydealingspecificallywiththeregressivenatureofeithertheGSTortheQST,itisnotinfrequentinQuebectohearthatconsumptiontaxesarearegressiveformoftaxation.However,ourresultscontradictthisview.
In2008,householdsinthelowestquintilepaid$398inGST-QST,takingintoac-countrefundableGSTandQSTcredits,comparedwith$6,704forhouseholdsinthehighestquintile.Allocatingtotalnettaxespaidin2008amongtheincomequintiles,thesharepaidbythe20percentofhouseholdswiththelowestincomeiscalculatedtobe2.6percent,comparedwith44.1percentforthe20percentofhouseholdswiththehighestincome.
InQuebec,thankstotheexclusionofcertaingoodsandservicesfromtheapplica-tionoftheGST-QST,butespeciallybecauseoftherefundableGST-QSTcredits,itisfalsetostatethatlower-incomehouseholdsallocatealargershareoftheirincome
61 Seesupranote47.
492 n canadian tax journal / revue fiscale canadienne (2011) 59:3
totaxesthanhigher-incomefamilies.Offsettingmeasureseliminatetheinherentregressivityofconsumptiontaxes.
Theriseintheeffectivetaxrateforconsumptiontaxesfromonequintiletothenext confirms that the applicationof consumption taxes inQuebec in2008wasprogressive(becausethechangeinnettaxespaidisproportionallygreaterthanthechangeinincome).Theeffectiveraterisessignificantlyforthelowestandsecondquintilesbeforebecomingmoreproportional.
TheanalysisalsoshowstheimpactoftherecentreductionsintheGSTandtheannouncedincreasesintheQST.WhileallhouseholdsbenefitedfromtherecentdecreasesintheGSTrate,thiswasespeciallytrueofhouseholdsinthelowerquintiles.AsforthefutureincreasesintheQST,theywillresultinincreasesintheeffectivetaxrateforallquintiles,buthouseholdsinthelowestquintilewillbeaffectedtoalesserdegree.Itissignificantthat,whilethefederalgovernmentdidnotadjusttheGSTcreditdownwardwhenthetaxratewasreduced,theQuebecgovernmentmadeapointofenhancingitscreditaspartoftheincreasestotheQSTrate.
Comparingthesituationthatwillexistin2012withtheonein2005,thereplace-mentoftwopointsofGSTbytwopointsofQST,combinedwiththechangestotheQSTcredit,willresultinadeclineintheaverageeffectivetaxrateofthefirsttwoincomequintiles,whilethatoftheotherthreequintileswilldropslightlyorremainunchanged.
Toconclude,whiletheanalysisrevealsthattheapplicationoftheGST-QSTisprogressiveinnature,itgoeswithoutsayingthatprogressivityismorepronouncedintheapplicationofincometaxinQuebec.TheQuebecgovernmentcontinuestorelyheavilyontheincometaxasasourceofrevenue.62Asaproportionofgrossdomesticproduct,incometaxationismoreimportantinQuebecthanintheotherprovincesandtheG7countriesasawhole.Accordingly,theaggregateprogressivityofconsumptiontaxesandincometaxesisgreaterthanthatofthetaxestakensepar-ately.Table11 shows the average total tax loadofhouseholds in eachquintile,takingintoaccountincometaxes,socialcontributions,GST,andQST.Measuredasaproportionoftotalincome,theraterisesfrom5.9percentforthelowestquintileto33.8percentforthehighest,clearlyshowingthattheuseoftaxesandsocialcon-tributionsisprogressiveinQuebec.
62 LucGodbout,SuzieSt-Cerny,andChantalAmiot,Année d’imposition 2008 : Une charge fiscale nette plus faible et des impôts sur le revenu plus élevés qu’ailleurs, est-ce possible?WorkingPaperno.2010/03(Sherbrooke,QC:Chairederechercheenfiscalitéetenfinancespubliques,UniversitédeSherbrooke,2010).
are consumption taxes regressive in quebec? n 493
TABLE 11 Average Tax Load of Households, by Income Quintile, Quebec, 2008
Lowest Second Third Fourth Highest quintile quintile quintile quintile quintile
dollars
Totalincome . . . . . . . . . . . . . . . . . 16,253 30,977 51,239 77,281 140,255Lesspersonalincometax(1) . . . . . 349 2,564 7,564 15,589 36,047After-taxincome . . . . . . . . . . . . . . 15,904 28,413 43,675 61,692 104,208Lesssocialcontributions(2). . . . . 204 929 1,880 3,132 4,669Netincome . . . . . . . . . . . . . . . . . . 15,700 27,484 41,795 58,560 99,539LessQSTandGST(3) . . . . . . . . . 398 1,315 2,752 4,049 6,704Netafter-taxincome........... 15,301 26,168 39,043 54,511 92,835Taxload(1+2+3) . . . . . . . . . . . 951 4,808 12,196 22,770 47,420
percentTaxloadasapercentageof
totalincome . . . . . . . . . . . . . . . . 5.9 15.5 23.8 29.5 33.8
Source:Calculationsbytheauthors,basedonStatisticsCanada,Survey of Household Spending, 2008(Ottawa:StatisticsCanada,2009),andSurvey of Labour and Income Dynamics,2008(Ottawa:StatisticsCanada,2010).